5th Semester Online Class

Corporate Accounting
Chapter – Underwriting of Shares and Debentures

Debasish Naskar
Assistant Professor, Department of Commerce,
Raja Peary Mohan College
Underwriting of Shares and Debentures
• Underwriting ofsecurities is an agreement, entered into by a company (issuing the
securities) with a financial agency to ensure that the entire issue of securities made by the
company gets fully subscribed. In other words, it refers to the function of covering the
risk of under-subscription of securities (i.e. shares, debentures, bond etc.) issued by a
company.
• The financial agency providing such service is referred to as the ' Underwriter' and it
agrees to buy that part of the company's securities which have not been subscribed for by
the public in consideration of a specified underwriting commission.
• The typical underwriting agreement, amongst others, usually provide for the period
during which the agreement is in force, the amount of underwriting obligations, the period
within which the underwriter has to subscribe to the issue after being intimated by the
issuer, the amount of commission and details of arrangements, if any, made by the
underwriter for fulfilling the underwriting obligations.
Benefits of Underwriting of Securities
The function of underwriting of securities provides various sorts of benefits to
different stakeholders, which are discussed hereunder:
• To the company: The underwriting service covers the risk of under-subscription
for a company. It ensures that the issuers of the security can raise the full amount
of capital as planned.
• To the investment banker: This service provides an important source of income (in
the form of commission) for an investment bank.
• To the investors: Investors benefit from the underwriting process as the
information provided by an underwriting agency can help them take more
informed buying decision.
• To the market: An underwriter who holds a large chunk of the securities of a
particular company is, usually, the 'market maker' for such a security, and thus
provides the core liquidity for the security and enhances price stability and
distribution.
Types of Underwriting of Securities
underwriting agreement can be classified into various types on different basis. are discussed in detail hereunder:

A. On the basis of extent of underwriting

Extent of underwriting refers to level of coverage of risk of under-subscription by the underwriter(s). On this
basis, the underwriting of securities can be classified into the following two types:
• Full Underwriting: When the whole issue of shares/ debentures of a company is underwritten by the
underwriter(s), it is called Full Underwriting. It is also referred to as Complete Underwriting. In such a case,
the whole issue is underwritten either by an individual/institution agreeing to take the entire risk of under-
subscription or by a number of firms/ institutions each agreeing to take the risk to a limited extent (but
covering the entire risk of under-subscription in aggregate). To state differently, the company is assured of the
fact that all its shares will get subscribed.
• Partial Underwriting: the whole issue of shares/ debentures of a company is not underwritten by the
underwriter(s), it is called Partial Underwriting. In such a case, the underwriter(s) have the responsibility of
subscribing only to the extent agreed upon in the underwriting contract. In other words, the entire risk of
under-subscription is not taken up by the underwriters; rather the issuing company has to shoulder some of the
risk.
Types of Underwriting of Securities
B. On the basis of number of underwriters involved

On this basis, the underwriting of securities can be classified into the following two types:

Single Underwriting: When the entire issue of securities is underwritten by one financial agency (i.e. a single underwriter), it
is referred to as Single Underwriting.

Syndicate/Multiple Underwriting: When the entire issue of securities is underwritten by more than one financial agency (i.e.
two or more underwriters) jointly, it is referred to as Multiple/Syndicate Underwriting. Such an agreement is entered into
when the total issue is beyond the resources of one underwriter or when the underwriter does not intend to have major stake in
one issue.
C. On this basis, the underwriting of securities can be classified into the following two types:

Firm Underwriting: It refers to an underwriting agreement as per which the underwriter gives a definite commitment to take
up a specified number of shares, irrespective of the number of shares subscribed for by the public. Such a commitment is
given when an underwriter is interested to subscribe securities in its individual capacity (and not in the professional capacity
of an underwriter). In this case, the underwriter(s) agrees to take up and pay for the committed number of securities as
ordinary subscribers in addition to their commitment as underwriters. Thus, in such a case, a 'firm' i.e. definite commitment is
given by the underwriter(s) to the company.
Regular Underwriting:
It refers to the usual underwriting agreement in which the underwriter(s) would be liable to take up the securities in the event
of under subscription. Thus, in such a case, the commitment is not a 'firm' commitment, rather a 'contingent' commitment.
Illustration 1
P Ltd. issued 2,00,000 equity shares. The whole issue was underwritten as: A — 40%; B —
30%; and C — 30%. Applications for 1,60,000 shares were received in all, out of which
applications for 40,000 shares had the stamp of A, those for 20,000 shares had that of B and
40,000 shares had that of C. The remaining applications for 60,000 shares did not bear any
stamp.
Calculate the liability of underwriters.
Find out the liability of the individual underwriters in each of the following independent
cases:
(a) Unmarked applications are apportioned in the ratio of "Gross Liability"; and
(b) Unmarked applications are apportioned in the ratio of "Gross Liability Less Marked
Applications".
Case (a): Unmarked applications are apportioned in the ratio of "Gross Liability"

Calculation of Liability of the underwriters (No. of shares)

Underwriters
A B C
Share of Gross Liability 40% 30% 30%
Gross Liability [2,00,000 shares in 4:3:3] 80000 60000 60000
Less:- Marked Application 40000 20000 40000
40000 40000 20000
Less:- Unmarked Application (W.N 1) 24000 18000 18000
Net Liability 16000 22000 2000

WORKING NOTE:
1. Apportionment of Unmarked Applications in Gross Liability ratio
Total number of Unmarked applications 60,000 (given); Ratio of Gross Liability 4:3:3
The unmarked applications are apportioned in the ratio of 'Gross Liability' i.e. 4:3:3 as under:

A: 60,000 x 4/10 = 24,000 B: 60,000 x 3/10 = 18,000 c: 60,000 x 3/10 = 18,000

Case (b): Unmarked applications are apportioned in the ratio of "Gross Liability Less
MarkedApplications“

Calculation of Liability of the underwriters (No. of shares)

Underwriters
A B C
Share of Gross Liability 40% 30% 30%
Gross Liability [2,00,000 shares in 4:3:3] 80000 60000 60000
Less:- Marked Application 40000 20000 40000
40000 40000 20000
Less:- Unmarked Application (W.N 1) 24000 24000 12000
Net Liability 16000 16000 8000

WORKING NOTE:
1. Apportionment of Unmarked Applications in ‘Gross Liability Less Marked Applications’ ratio
Total number of Unmarked applications 60,000 (given); Ratio of Gross Liability Less Marked Application
= 40:40:20 = 2:2:1
The unmarked applications are apportioned in the ratio of 'Gross Liability Less Marked Applications' i.e. 2:2:1 as under:
A: 60,000 x 2/5 = 24,000 B: 60,000 x 2/5 = 24,000 c: 60,000 x 1/5 = 12,000
Illustration 2
T Ltd. incorporated on June l, 2019 issued a prospectus inviting
applications for 20,000 equity shares of Rs.10 each. The whole issue
was fully underwritten by A, B and C as follows:
A— 10,000 shares; B — 6,000 shares; and C 4,000 shares.
Applications were received for 16,000 shares of which marked
applications were as follows: A — 8,000 shares; B — 2,850 shares; and
C — 4,150 shares.
You are required to find out the liability of individual underwriters.
Case (a): Unmarked applications are apportioned in the ratio of "Gross Liability"

Calculation of Liability of the underwriters (No. of shares)

Underwriters
A B C
Gross Liability [20,000 shares in 5:3:2] 10000 6000 4000
Less:- Marked Application 8000 2850 4150
2000 3150 (150)
Less:- Unmarked Application (W.N 1) 500 300 200
1500 2850 (350)
Surplus of C appointed between A&B in the ratio
of their Gross Liability as 5:3 (219) (131) 350
Net Liability 1281 2719 Nil
WORKING NOTE:
1. Apportionment of Unmarked Applications
Total NO. of Unmarked applications = 'Total number of Applications received' Less 'number of Marked applications’
= 16,000 – (8000+2850+4150) = 1000
Gross Liability = 10000:6000:4000 = 5:3:2
The unmarked applications are apportioned in the ratio of 'Gross Liability' i.e. 5:3:2 as under:
A: 1,000 x 5/10 = 500 B: 1,000 x 3/10= 300 c: 1,000 x 2/10 = 200
On January 1, 2019, Moon Ltd. issued a prospectus inviting applications for
subscription in 10,00,000 equity shares of Rs. 10 each. The whole issue was
underwritten by A, B, C and D as under:
A: 30% B: 25% C: 35% D: 10%
The applications were received for 8,00,000 shares of which marked
applications were as follows:
A: 180000 B: 200000 C: 203000 D: 167000
Find out the liability of the individual underwriters.
[C.U. B.Com (H) 2006
Calculation of Liability of the underwriters (No. of shares)
Underwriters
A B C D
Share of Gross Liability 30% 25% 35% 10%
Gross Liability [10,00,000 shares in 6:5:7:2] 300000 250000 350000 100000
Less:- Marked Application 180000 200000 203000 167000
120000 50000 147000 (67000)
Less:- Unmarked Application (W.N 1) 15000 12500 17500 5000
105000 37500 129500 (72000)
Surplus of D appointed between A,B & C in the ratio
of their Gross Liability as 6:5:7 (24000) (20000) (28000) 72000
Net Liability 81000 17500 101500 Nil
Working Note:
Total No. of Unmarked applications = 'Total No. of Applications received' Less 'No. of Marked applications’
=800000 - (180000+200000+203000+167000) = 50,000
Ratio of Gross Liability = 30%:25%:35%: 10% 6:5:7:2
The unmarked applications are apportioned in the ratio of 'Gross Liability' i.e. 6:5:7:2 as under:
A: 50,000 x 6/20 = 15,000 B: 50,000 x 5/20 = 12,500 c: 50,000 x 7/20 = 17,500 B: 50,000 x 2/20 5,000
The following underwriting took place for P Ltd. which invited applications for
10,000 shares of Rs. 10 each: X: 6,000 shares Y: 2,500 shares Z: 1,500
shares.
In addition, there were firm underwriting as follows:
X: 800 shares Y: 300 shares Z: 1,000 shares
Total subscription including firm underwriting was 7,100 shares, and the
forms included the following marked forms:
X: 1,000 shares Y: 2,000 shares Z: 500 shares
Show the allocation of liability of the underwriters.
[C.U. B.Com (H) 2015; Similar problem C.U. B.Com (H) 2010]
Calculation of Liability of the underwriters (No. of shares)
Underwriters
X Y Z
Gross Liability 6000 2500 1500
Less:- Marked Application 1000 2000 500
5000 500 1000
Less:- Unmarked Application (W.N 1) 2160 900 540
2840 (400) 460
Surplus of Y apportioned between X & Z in the
Ratio of Gross Liability (320) 400 (80)
Net Liability under Contract 2520 Nil 380
Add:- Firm Underwriting 800 300 1000
Net Liability 3320 300 1380
WORKING NOTE:
1) Apportionment of Unmarked Applications
Total Applications (including Marked applications & Firm underwriting) 7100
Less: Marked applications (1 ,000 + 2,000 + 500) 3500
Unmarked applications (including Firm underwriting) 3600

Ratio of Gross Liability - X: Y: Z = 6,000: 2,500: 1,500

The unmarked applications are apportioned in the ratio of 'Gross Liability' i.e. 12:5:3 as under:
x: 3,600 x 12/20 = 2,160 Y: 3,600 x 5/20 = 900 Z: 3600 x 3/20 = 540
Calcutta Ltd. offered to the public 18,00,000 shares for issue at par. This
offer was underwritten by three underwriters — Chetan, Dola and Ellias
equally, with firm underwriting 60,000 shares each. The subscriptions
totaled 15,80,000 shares received from the public including the marked
forms, which were: Chetan: 500000 Dola: 540000
Ellias: 440000
The underwriters had applied for the number of shares covered under
firm underwriting. Calculate the liability of the underwriters (regarding
number of shares).
[C.U. B.Com (H) 2008 -Adapted]
Calculation of Liability of the underwriters (No. of shares)
Underwriters
C D E
Gross Liability [18,00,000 shares in 1:1:1] 600000 600000 600000
Less:- Marked Application 500000 540000 440000
100000 60000 160000
Less:- Unmarked Application (W.N 1) 93333 93333 93333
6667 (33333) 66666
Surplus of D apportioned between C & E in the
Ratio of Gross Liability [1:1] (16667) 33333 (16666)
(10000) Nil 50000
Surplus of C further transfer to E 10000 - (10000)
Net Liability under Contract Nil Nil 40000
Add:- Firm Underwriting 60000 60000 60000
Net Liability 60000 60000 100000
Working Note:
1. Apportionment of Unmarked Applications
Total Subscription (including Marked applications but excluding Firm underwriting) 1580000
Less: Marked applications excluding 'Firm' (5,00,000 + 5,40,000 + 4,40,000) 1480000
Unmarked applications (received from public) 100000
Add: Firm underwriting [60,000 + 60,000 + 60,000] 180000
. Unmarked applications (including Firm underwriting) 280000

Ratio of Gross Liability — Chetan: Dola: Ellias 1 : 1 : l . The unmarked applications are apportioned in the ratio of 'Gross
Liability' i.e. 1:1:1 as under:
Chetan: 280000x 1/3 = 93,333 Dola: 280000x 1/3 = 93,333 Ellias: 280000x 1/3 = 93,334